Whether high discount from foreign supplier can itself be a reason for rejection of transaction value as per Section 14 of the Custom Act, 1962?

Case:-   VASCO DA GAMA DISTILLERIES PVT.LTD. VERSUS COMMR. OF CUS. & C.EX, GOA

Citation: -2012 (284) E.L.T. 417 (Tri- Mumbai)

Brief facts: - The Appellant M/s. Vasco Da Gama Distilleries Pvt. Ltd., had imported a consignment of 80 drums of 200 litres each of concentrate of Scotch whisky vide Bill of Entry No. 108861 dated 7-6-2007. The DRI, Goa Unit had intelligence that the importer had under-valued the consignment and, accordingly, initiated investigation into the matter. It was noticed that the importer had declared the goods as comprising of "Concentrates of Alcoholic Beverages, matured for more than three years" and the total quantity of import was 16000 litres of Scotch whisky at a unit price of US $ 1.00 per bulk litre (CIF), Goa. It was also revealed that they had imported another such consignment vide Bill of Entry No. 107071 dated 28-9-2006 wherein also a total quantity of 15400 litres of the said goods had been imported at US $ 1.00 (CIF), Goa and three drums of "Concentrate of Alcoholic Beverages matured for more than 12 years" containing 600 litres at a unit price of US $ 2.00 (CIF), Goa per bulk litre. Both consignments were imported from M/s. Loch Lomand Distilleries Ltd., Scotland, U.K. and covered by invoices No. 4254 dated 15-8-2006 and 4823 dated 17-8-2007. 'file Letter of In-tent dated 17-3-2006 and a letter dated 29-5-2007, issued by the foreign supplier certified the strength of alcohol in the goods imported was not less than 62% and not more than 67% alcohol by volume. The representative samples were also drawn from the consignment which was forwarded to the Deputy Chief Chemist for examination and the test report issued by the Deputy Chief Chemist indicated that the samples are in the form of reddish brown colored alcoholic beverage having characteristics of whisky. Alcoholic strength of the each sample is 68% V/V at 25°C. The investigation further revealed that the importer who maintaining a Current Account with Dena Bank and had opened a L.C., for the imports. Scrutiny of the documents received from the Dena Bank, confirmed that the goods under importation was Scotch Whisky and the invoices relating to the imports were No. 4254 dated 15-8-2006 and 4823 dated 17-8-2007. Enquiries made from different ports about the import of similar goods indicated that identical goods were imported and cleared at much higher value ranging from GBP 1.45 (CF) per bulk litre to GBP 3.58 per bulk litre. The investigation further revealed that M/s. Loch Lomand Distilleries Ltd., Scotland had supplied similar goods to M/s. Mc Dowell and Co. Ltd., India at prices ranging from GBP 1.45 to 1.65 per bulk litre and to M/s. United Spirits India Ltd. at prices ranging from GBP 1.45 to 1.65 per bulk litre and alcoholic content in respect of these imports were in the range of 66% to 67% comparable to the imports made by the appellant in the present case. In the absence of any satisfactory explanation for the difference in prices, a show-cause notice was issued to the appellant proposing to demand differential customs duty by enhancing the value of the imported consignment from US $ 1.00 per bulk litre under Rule 5 of the Customs Valuation Rules, to the value of contemporaneous imports of identical goods under Section 28 of the Customs Act, 1962, along with interest thereon under Section 28AB ibid. It was also proposed to impose penalty on the appellant importer under Section 112(a) and (b) and Section 114A of the Customs Act, 1962. It was further pro-posed to impose penalty on Shri Pawan Agarwal and Shri Vipan Malhotra, Directors of the importing firm under the aforesaid provisions. The case was adjudicated vide impugned order and the differential duty demand of Rs. 49,70,753/- was confirmed along with interest thereon by enhancing the value of the goods imported under Rule 5 of the Customs Valuation Rules, by adopting a CIF price of Rs. 124.59 per bulk litre as against Rs. 40.90 adopted by the appellant in the Bill of Entry No. 108861 dated 7-6-2007 and Rs. 46.80 per bulk litre in respect of Bill of Entry No. 107171 dated 28-9-2006. A penalty of Rs. 55,14,974/- was imposed on the appellant-firm and a penalty of Rs. 1,00,000/- each was imposed on Shri Vipan Malhotra and Shri Pawan Agarwal, directors of the appellant firm. Against this order, the appellants are before Tribunal.

Appellant’s Contentions: - The learned Advocate for the appellant submitted that the rejection of the declared transaction value was neither legal nor proper. As per the statement dated 30-10-2007 recorded from Shri Pawan Agarwal, Director of the appellant, the price of concentrate of Scotch whisky was GBP 1.03 per litre. After negotiating, the price was finally brought down to US $ 1 per litre. Letter of Intent dated 17-3-2006 was issued by the foreign supplier M/s. Loch Lornand Distilleries Ltd. and thereafter proforma invoice was also issued. The appellant applied to their bank for issuance of irrevocable Letter of Credit in favour of the foreign supplier and, accordingly, shipment was effected by the foreign supplier. The statement and the documentary evidence available on records conclusively established that the declared price was genuine and was a negotiated price. It was the transaction value and nothing over and above the price was paid by the appellant to the foreign supplier. It was further contended by the appellant that the goods imported by M/s. Mc Dowell Co. Ltd. and M/s. United Spirits Ltd. are not comparable with those imported by the appellant. The goods imported by M/s. Mc Dowell had a higher malt content which is suitable for blending with Indian whisky. Similarly, the imports of M/s. United Spirits Ltd. were not comparable because they had imported branded whisky of Black Dog brand whereas in the instant case, the goods imported were not branded.

He further submitted that the appellant were only bottling the diluted whisky under licence from the foreign supplier and the foreign supplier's name also indicated in the labels stating that diluted under licence from British East India Company by M/s. Vasco da Gama. In the case of imports by M/s. Mc Dowell Co. Ltd., the concentrate of alcoholic Beverages were imported for blending with Indian whisky and it was not for dilution and bottling; the same was the case in respect of imports by United Spirits Ltd. In those cases higher malt content was required since they were blended with Indian made whisky whereas in the case of the appellant, the product imported was a blend of grain and malt whisky suitable for direct consumption after dilution with water. The cost of production of malt whisky is much higher than that for grain whisky. As per the directions of the department, they had also produced a letter dated 22-10-2009 wherein the foreign supplier had confirmed as follows:-

"This is to certify that following the letter of intent 17th March 2006, we supplied to you in two consignments in the year 2006 & 2007; 32000 bulk litres of Scotch Whisky (what you refer to as Concentrate of Alcoholic Beverage) at natural strength (65% & 62% Al3V)(31,400 Litres matured for three years and 600 Litres matured for 12 years) distilled by us and other Scotch whisky distillers, and aged in a warehouse in Scotland. The Scotch Whiskey supplied to you was a blend of grain whisky & malt whisky and was suitable to be used for direct consumption after dilution with demineralised water to reduce the strength to not less than 40% alcohol by volume. In answer to your question about the malt content and variations in pricing to other clients in India, I can confirm that each different blend has a different malt content and that the price charged will - in great part - be dependent on the malt content (as the cost of producing malt whisky is much higher than that for Grain Scotch Whisky). The level of complexity in each blend is - in part - determined by the malt content, A higher malt content will, generally speaking, produce a blend of more intense flavors and thus more suitable for blending with neutral spirit (what we term an "ad-mix") for products such as Indian Whisky. The price charged for each blend to each different customer will be de-pendent on the blend supplied to them and also what profit margin can be achieved within the relevant sector of the market."

The appellant also submitted extracts from the website which showed that the production of grain whisky is much easier and cheaper than distillation of malt whisky. The learned Counsel also relies on the judgment of the Hon'ble Apex Court in the case of Eicher Tractors Ltd. v. Commissioner of Customs, Mumbai - 2000 (122) E.L.T. 321 (S.C.) wherein it was held that existence of the price list of the foreign supplier does not disprove the transaction value and cannot be the sole reason for rejection of the transaction value. The importer is at liberty to negotiate with the foreign supplier for discounts which may be granted for a variety of reasons including of stock clearance. The production of price list does not change the onus cast on customs authorities to prove the existence of special circumstances indicated in Section 14(1) of the Customs Act, 1962 and particularized in Rule 4(2) of the Customs Valuation Rules, 1988. In the said decision the Hon'ble Apex Court allowed even a discount as high as 77% from the list price holding that it was not abnormal in the facts and circumstances of the case. The ratio of the above judgment would squarely apply inasmuch as they had negotiated the price with the foreign supplier and all the documents available on the record indicates that the prices which they declared in the import documents were the prices which were paid to the foreign supplier and there was no evidence whatsoever of paying a higher price to the foreign supplier or any other consideration was involved in the transaction which had the impact of reducing the transaction value.

Respondent’s Contentions:-   The learned AR appearing for the Revenue on the other hand reiterates the findings given by the adjudicating authority. They submit that in the case of comparable values which have been adopted for enhancement of the value in the appellant's case, the supplier was the same, namely M/s. Loch Lomand Distilleries Ltd. The description of the goods was also the same as three year old blended Scotch whisky with approximately 66.9% V/V and the value declaration in those cases was GBP 1.45 per bulk litre. The period of import was also in December, 2006 and January, 2007 corresponding to the period of import in the instant case. In the case of M/s. United Spirits Ltd. also the periods of import were March, 2007 to May, 2007, and the price declared was much higher. Accordingly, they submit that the value of contemporaneous imports of identical material shows a higher transaction value and, accordingly, enhancement of transaction value in the instant case to those of contemporaneous import under Rule 5 of Customs Valuation Rules is justified and accordingly they plead for upholding the demand of duty along with interest thereon and consequent penal liabilities.

Reasoning of Judgment: The Tribunal held that in the statement recorded under Section 108 of the Customs Act, 1962, Shri Pawan Agarwal had clearly explained the reasons as to how they were able to negotiate a lower price of US $ 1 per litre in respect of the imports made by them from M/s. Loch Lomand Distilleries Ltd. The questions put to him and replies given by him are reproduced below:-

“Q10. How come that you were given the discounted price of $ 1.0 per litre?
Ans. We bargained with Mr. Gavin J.P. Durnin, Director (Sales) of M/s. Loch Lomand Distilleries Ltd., that we are starting a new business, we will be promoting their companies product in India and we have to compete with the established players in the market. I would also like to state that we are the first company in India which is bottling/selling scotch whisky under private brand name by utilizing 100% ingredient of imported concentrates of scotch whisky and we are not using this concentrate for manufacturing Indian blended whisky. The Scotch whisky being sold by us is Scotch entirely blended and matured in Scotland by M/s. Loch Lomand Distilleries Ltd. and the manufacturing process involves only dilution of the concentrate of Scotch whisky by adding demineralised water to bring the alcoholic strength to the desired level, as per the prescribed norms. All other importers in India are either importing concentrate of scotch whisky for the purpose of blending/mixing it with indigenous material to produce their own brand of Indian whisky, or they are importing concentrate of scotch whisky to bottle/produce some foreign brand of scotch whisky in India. The company, M/s. Loch Lomand Distilleries Ltd. also wanted to establish themselves in India and in order to advertise their product in India; they agreed to supply us concentrates of scotch whisky at a rate which was affordable to us. In fact, they even offered to supply one container free of cost as a sample for promotional purposes. Therefore, when we offered them rate of $ 1 per litre (Ex-Goa) for supply of eight containers (1,28,000 ars) of concentrate of scotch whisky, it was readily agreed upon by them.

Q11. What was the basis of your offer price of $ 1.0 per litre?
Ans. We have just carried out certain calculations and thought that if we are able to procure raw material, i.e., concentrate of Scotch whisky, at $ 1.0 per litre we would be able to sell our finished product at competitive price in Indian market.

Q12. How you are popularizing the products of M/s. Loch Lomand Distilleries Ltd. in India, in return for the discount given exclusively to your company?
Ans: We are mentioning on the labels of the bottles of whisky bottled/sold by us that "the contents of the bottle when filled and sealed is "scotch whisky" which is distilled matured and blended by Loch Lomand Distillers Ltd., Scotland".

Q13. Do you have documents showing the negotiations of price or any rate contract about the supply of concentrate of Scotch whisky @ $ 1.0 per litre prior to the Letter of Intent dated 17-3-2006 issued by M/s. Loch Lomand Distillers Ltd., to M/s. VDGDPL?
Ans: No, the negotiations were carried out personally by me and Captain W.G. Macdonald and once the rates were finalized with Mr. Gavin J.P. Durnin, the letter of intent was issued to us. I am herby submitting copy of the same duly attested by me."

From the above statement of the Director of the firm, the reasons for obtaining a lower price due to intense negotiation have been clearly brought out and the Revenue has not discharged the onus cast on them by contraverting the statement of Shri Pawan Agarwal. From the records tribunal find that the appellants have imported the concentrate Scotch whisky for dilution and sale and not for blending. Whereas M/s. Mc Dowell Co. Ltd. had imported the Scotch whisky for blending with Indian whisky as is evident from the labels of Mc Dowell Whisky. This very clearly shows that the purpose for which the concentrates of alcoholic beverages imported was different. The foreign supplier in the letter dated 27-10-2009 has also confirmed with respect to the difference in the price between the goods supplied to the appellant and other importers in India that each different blend has different malt content and that the price charged will be dependent on the malt content. The foreign supplier has also in the said letter confirmed that the cost of malt whisky is higher than that for Grain Scotch Whisky. This submission of the foreign supplier is also confirmed by the literature available on the subject matter in the intemet wherein it is stated that production of grain whisky is much easier and cheaper than distillation of malt whisky (www.maltmadness.com). Similarly Wikipedia also confirms that Neutral spirits, near-neutral spirits and other 'fillers' are usually much cheaper to produce than straight or single malt whisky, so blends containing them are usually much cheaper to buy. Therefore tribunal is of the view that that the explanation given by the appellant for obtaining the lower price in respect of the supplies from the foreign supplier is convincing and, therefore, there was no reason to reject the transaction price declared by them. Thus tribunal held that there is no evidence available on record to prove that the appellant had paid higher sum than what was declared in the import documents as also in the bank documents. Thus, the Revenue has completely failed to prove the charge of under-valuation in the instant case. As held by the Hon'ble High Court in the case Eicher Tractors Ltd. (supra) merely because the appellant obtained higher discount from the foreign supplier by itself cannot be a reason for rejection of the transaction value. The ratio of the said judgment applies squarely to the facts of the case. Therefore the impugned order is set aside and allows the appeal with consequential relief, if any. The stay application is also accordingly disposed off.

Decision:- Appeal allowed

Comments:It is observed from the above case that merely because high discount has been given to the assessee cannot be held that the assessee has manipulated the transactional value where there is proper evidence and explanation on fact that the assessee had genuinely negotiated such a discount in its favour.

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PJ/Case Laws/2012-13/1282

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